In what has been a rather dull trading session, Sterling’s rally today has stood out. British Prime Minister Theresa May and European Commission President Jean-Claude Juncker today announced that they had reached an agreement on the UK’s future relationship with the EU. The draft document, which at 25 pages is considerably shorter than the draft Withdrawal Agreement which was agreed upon by both sides last week, is rather light on details in many key areas, including the financial sector.
The impression it leaves is that both sides have effectively to agree to revisit some of the more complicated issues during an implementation period which will last from 29th March 2019 – when the UK will officially cease to be an EU member – until at least 31stDecember 2020. This draft deal has now been passed to the heads of the state of the other 27 EU member states for their consideration. Theresa May has in the past week successfully batted away any credible challenge to her leadership and has today been presenting this draft agreement to cabinet colleagues.
But there are two “risks” near-term. The first is that EU leaders could seek revisions to the current draft agreement ahead of a special EU Summit scheduled for Sunday 25th November, which could in turn further remove the gloss from the deal which Prime Minister May managed to secure last night in Brussels. Moreover, the draft agreement in many ways kicks the can down the road on many critical aspects of the future UK-EU relationship, which is unlikely to appease concerns among government and parliamentary members that the UK could be signing off on a deal which leaves the UK vulnerable and ultimately worse off than it currently is. The GBP/USD cross, which has edged up above 1.28, is likely to remain choppy and volatility could rise exponentially in the run-up to a parliamentary vote which Theresa May is hoping could take place in mid-December.
